"So freaking what?" we hear the naysayers say. "A $7 billion
valuation on $100 million in revenues is insane!"

Really?

Look at it this way: in 2001, Google
earned $7 million in profits on $86 million in revenue.

Anyone who had invested in Google at a $7 billion valuation in
2001 would have been called the world's biggest moron.
(Especially considering the fact that an actual bubble had
recently popped.) A 1000X profit multiple!

And anyone who had invested in Google at a $7 billion valuation
in 2001 would also have tripled her money in three years, when
Google went public in 2004 at a valuation above $20 billion. (And
if she'd held on to her stake, made a 20X return over 7 years.)

Of course, not every company making $7 million in profits is
worth billions. But every once in a while, a few of them are. And
it's investors' job to invest in several of those that might look
like the next Google, be mercilessly mocked by the armchair
quarterbacks, and have enough winners out of the lot that they
can laugh all the way to the bank.

Here's what Twitter has in common with 2001-era Google:

A simple, beautiful product that users love and that's
growing like wildfire

But that's not the thing that makes Google and Twitter worth
billions, as opposed to hundreds of millions.

The thing that makes you worth billions is a revenue-generating
product with huge momentum.

It doesn't matter the absolute numbers of your revenue, whether
it's $100 million or $10 billion or $10 million. What matters is
the slope of the curve. Whether customers can't get enough of
your product, as was the case with Google when they launched
search advertising and couldn't believe just how many people were
buying.

(The reason the absolute value of the numbers don't matter, by
the way, is that the value of an asset is the net present value
of its future cash flows. In an early stage business,
growth rates are more important to estimate future cash flows.)

From 2001 to 2004, Google's revenue grew from $86 million to $1.5
billion. That's staggering.